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The Ripple Effects of Digital Transformation
by Olivier Blanchard | September 1, 2016
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A seemingly random Wall Street Journal article caught my eye the other day.

I confess that the photo of containers stacked like bricks on what appeared to be a commercial dock is what originally drew my attention (it isn’t your typical financial market, product review or technology stock photo), but as I started reading it, the wheels started turning. Here’s the part that drew me in:

In July, when shipping volumes typically start their peak-season ramp-up, imports fell at the nation’s two busiest port complexes, in Southern California and New York. The National Retail Federation estimates that August and September will continue the trend, with import volumes down slightly for both months from the same period last year. The slowdown extends to the nation’s highways and railroads. Freight carried by road and rail fell 2.6% in July compared with the same month in 2015, the 17th consecutive month of year-over-year declines.” – Erica Phillips and Robbie Whelan

Here’s why this is significant: The title of that article is At Ports, a Sign of Altered Supply Chains: Flat import activity indicates how retailers are adjusting as customers shop online.

Now we’re starting to connect the dots a little:

  1. Retailers are adjusting to the impact that e-commerce is having on their brick and mortar retail inventories.
  2. Some traditional retailers like JC Penney are trying to counteract growing inventories of unsold goods by placing smaller orders.
  3. More agile retailers are adjusting their supply chain model to better match customer needs on an order by order basis.
  4. The most digitally-savvy among those agile retailers are even using predictive modeling analytics to optimize their logistics and supply chains.
  5. The combined result is a disruption in shipping volumes, and a trending one at that.

Now, having just done some research on the impact of e-commerce on retail sales in the US, I know that the relationship between e-commerce and the entire retail ecosystem isn’t exactly on the level of cheetahs and antelopes. Take a look:

retail sales data

We’re talking about incremental growth, not massive and sudden disruption. And yet, that 1% YoY change is contributing to a 2.6% YoY decrease in freight carried by rail and road. How about that?

If you are super interested in having us dig deeper into the shifts going on in retail, let us know, and we’ll put together a comprehensive report on the subject. For now though, my observation is simply this: You can usually work you way backwards from the ripple effects of disruption to identify the catalyst or cause of that disruption, and this is no different. 17 consecutive months of freight volume declines when consumer spending is strong? What’s going on there? Did people stop buying clothes, laptops, smartphones, cars and HD TVs? Not last time I checked. So what could be causing this trend? What other trends could realistically be connected to this?

I read an article like this, and my mind goes right back to this chart. Obviously, there are other factors involved, but it helps explain at least some of the shift that freight carriers and commercial ports may be feeling. Follow the logic:

  1. Online shopping mostly means orders being shipped straight to the customer (rather than going from shelf to cart or rack to bag).
  2. A 1% YoY shift to e-commerce teaches retailers to manage their inventories and logistics differently.
  3. The more retailers learn to manage their inventories and logistics better, the more their internal Digital Transformation initiatives take shape.
  4. Analytics allow them to optimize production, inventories and bulk product orders to minimize risk and losses.
  5. Smart logistics and agile partnerships allow them to run lean and more efficiently.
  6. Because these changes are mostly internal, industries around them, which are usually several degrees removed from consumer behaviors, aren’t aware of the change, and may not understand how it will affect them. Without very open lines of communications between retailers and all of their partners, adaptation to change is likely to happen asymmetrically.
  7. Asymmetric change causes friction points in the supply chain ecosystem.

You can always spot the companies whose Digital Transformation initiatives are either inadequate or nonexistent: They’re the ones suffering and scratching their heads during market shifts. Meanwhile, companies with effective Digital Transformation initiatives already in play tend to adapt to change and disruption pretty well, and even manage to gain a competitive advantage over their lumbering competitors. The good news is that there is a lot that suppliers, shipping companies and freight carriers can do to keep up and not get left out during this transition. The bad news is that many may still be in the dark about what those moves are.

This is the part where I usually say “adapt or die,” but in this case, “adapt or feel the pain” seems more appropriate. Still though, the writing is on the wall: Smartphones, Amazon and Alibaba aren’t going away. Shopping malls aren’t going to make a comeback. Sitting there waiting for things to go back the way they were isn’t the best of plans. Commercial ports and freight carriers are going to have to adapt too, and by that, I don’t mean laying off staff and contracting. I mean being smart and looking at a shift like this one as an opportunity rather than a calamity. We’ll leave it at that. Helping supply chains become more digitally agile is a topic for another day.

 

by Olivier Blanchard

 

About the Author

Olivier Blanchard has extensive experience managing product innovation, technology adoption, digital integration, and change management for industry leaders in the B2B, B2C, B2G sectors, and the IT channel. His passion is helping decision-makers and their organizations understand the many risks and opportunities of technology-driven disruption, and leverage innovation to build stronger, better, more competitive companies.  Read Full Bio.